Partnerships - Please Help! - The Book-keepers Forum (UK)

Minty · Veteran Member

Partnerships - Please Help!

Neil · Senior Member

Hi Matthew

Ill try to answer you because your questions are of interest to me too. Ive studied partnerships under manual bookkeeping but not in Sage so Im trying to work out how I would deal with this.

Firstly, the Sage Year End procedure appears to transfer the contents of Profits and Loss to Retained Profits. Id imagine that all appropriation to partners, interest and salaries would be paid in or out of this but Im guessing.

Cheers

Neil

-- Edited by Neil on Wednesday 17th of March 2010 02:00:40 PM

Wella · Expert

Don't know if it is of use but Sages solution is listed in Ask Sage article 11242

Basically it is a transfer from the P&L account into the appropriate partner account

You need to register with Sage to use the Ask Sage help but there is no obligation

http://support.sage.co.uk/default.aspx?page=1

Bill

littlebookkeeper · Senior Member

Hi Matthew,

I doubt sage could do appropriation accounts, these need to be manual adjustments but I stand to be corrected.

Appropriation Account - This could be prepared monthly, depending on how accurate the monthly accounts are required to be. In my experience this exercise was normally prepared by the accountant for the year end accounts and all the necessary adjustments sorted then. ....?

Drawings - Set up individual drawings accounts for each partner and post their drawings when they are paid from the bank as a bank payment, or yes DR drawings CR bank.

Interest on Drawings -
What does the partnership agreement say? If done monthly then with 1/12 of the interest I would CR profit and loss, DR individual Partners current account.

Salary - Create a code for the individual partners salaries just like drawings and DR partners salary CR bank or post as bank payment to this code.

Interest Earned on Capital - This is a current account adjustment. See partnership agreement whether it is monthly and if so CR individual partners current account DR profit and loss account with 1/12 of the interest as profit needs to be reduced by this interest, before the profit share is calculated if that makes sense?

Share of Profits - this is done after all the other adjustments for interest and salaries and it is the profit remaining split between the partners in the relevant profit share ratio.

Interest on Loan - Interest on loan from a partner CR current account DR profit and loss account (same as interest on capital). Leave the partners loan account alone.

The only 'real money' transactions are those that are made from the bank either salaries paid to partners or drawings actually paid from the bank. Or money actually physically put into the bank from the partners in the form of capital or loan. All other adjustments are made directly to the current account if that makes sense?

What the partners actually draw is usually stipulated in the partnership agreement. Partners should not withdraw more than they have in their partners current account otherwise they are in effect 'overdrawn' similar to a bank current account. The current account balance should be a credit balance.

The partners current account in effect shows what they 'could' take and what they would be entitled to if the the business was to cease at that point in time.

The appropriation account is a means of working out what the partners profit will be. The profit of the partner for tax purposes will be the total of their profit share, salary, interest on drawings less interest on capital.

Do you have a bookkeeping and accounts book? I have the kaplan advanced accounting and this has a good section on partnerships.

Wella · Expert

Hi Carole

You are right Sage don't have an appropriations account, the article I refered to is just their solution.

It is more or less the same as you have said and is achieved through journal adjustments.

Bill

PJC Bookkeeping · Veteran Member

Minty,

Are you a member of the ICB? You could obtain a copy of the Mock Level 3 Computerised Bookkeeping Exam paper (for Wyde Manufacturing Company) because one question involves a trading partnership. And the answers show the journals required to complete the year-end.

Only £5! smile

Regards

Peter

PJC Bookkeeping Services

Minty · Veteran Member

Can I say a massive thank you to everyone for their help? Fantastic!

Wella

Thank you so much for directing me to the Ask Sage article - I hadn't realised it, but I was already registered from when I first registered my software. Now I have a wealth of information at my fingertips.

The article was exactly what I needed to see in black and white.

Carole (littlebookkeeper)

Your points do concur with the information in the article.

However, you have given that little bit more insight into how things may be done on a monthly basis (I was confused by the combination of what I saw as regular transactions - drawings and salary - and end-of year stuff) and also your point on what the balance in the current accounts actually represents (ie. what the partners are entitled to draw) was very helpful smile

.

So thank you very much for doing that for me.

Peter (PJC)

We must stop meeting like this!

I am with the IAB - I think that is where my problem lies. I am self-teaching using their Study Texts. To be honest, I don't think they are very good (my opinion, of course).

They seem to leave a lot of necessary information out, and the wording is sometimes misleading. Plus, I've had to make a lot of typo corrections - for instance they have put things like Capital Account when they meant Current Account, and numerous number errors in other sections of the books. blankstare

Anyway, the exam paper sounds great, but I think I can put partnerships behind me now biggrin

. But thank you very much for your suggestion wink

.

Neil

I hope you have benefitted from this thread as much as I have. wink

I'm a happy boy today. I can move on, at last!

biggrin

-- Edited by Minty on Thursday 18th of March 2010 09:32:54 AM

-- Edited by Minty on Thursday 18th of March 2010 09:39:27 AM

-- Edited by Minty on Thursday 18th of March 2010 09:44:00 AM

-- Edited by Minty on Thursday 18th of March 2010 09:45:06 AM

-- Edited by Minty on Thursday 18th of March 2010 10:42:32 AM

Neil · Senior Member

Matthew

I think I have. I should receive the ICB mock paper any time now and I'll be referring to this thread and the Sage article.

Good luck with your course.

Cheers
Neil

Minty · Veteran Member

Okay. I'm fairly sure I have this down now. wink

I would be very grateful if someone would check that the following (very basic) example is correct:

Scenario

3 Partners start up in business - Partners A, B and C.

The Partnership agreement states:

Interest on Capital:        5%
Interest on Drawings:    5%

Their Capital Input is as follows:

Partner A:   £50000
Partner B:   £35000
Partner C:   £15000

Posted as:

CR Capital
DR Bank

Sales: £175000

No Purchases or expenses (told you I was keeping it basic biggrin

).

The partners drawings in the year are:

Partner A:   £10000
Partner B:   £15000
Partner C:   £11000

Posted throughout the year directly to their current accounts:

CR Bank
DR Current Accounts

At year end, using Sage, I would run the year-end process.

Then, on day 1 of the new financial year I would do the following:

Interest on Drawings

CR Profit & Loss
DR Current Accounts

Interest on Capital

CR Current Accounts
DR Profit & Loss

Now I can calculate each partner's Share of Profit:

DR Profit & Loss
CR Current Accounts

(opposite if a loss)

==============================
My books now show:

Profit & Loss account: Zero balance

Current Account balances:

Partner A:   £77900
Partner B:   £46130
Partner C:   £14970

Capital Accounts Balances:

No change

Bank:

£239000

==========================
Assuming Salaries were involved, I would post these in the same way as Drawings - directly from Bank to Current Accounts throughout the year, with no transfer to P & L (?).

Hopefully I have understood this properly.

wink

The only thing I'm still not sure on is Loan Interest. Any detailed information on how this is dealt with from beginning to end would be most welcome.

Thanks in advance.

Matthew

-- Edited by Minty on Saturday 20th of March 2010 11:23:58 AM

-- Edited by Minty on Saturday 20th of March 2010 11:25:09 AM

-- Edited by Minty on Saturday 20th of March 2010 11:25:27 AM

-- Edited by Minty on Saturday 20th of March 2010 11:26:32 AM

-- Edited by Minty on Saturday 20th of March 2010 02:35:21 PM

Wella · Expert

Hi Matthew

Couple of pointers

I would do the appropriations on the last day of the financial year.

You haven't said if the profit share ratio is 1:1:1 or 10:7:3 (as per capital intro, this would be in the agreement)

I have assumed 1:1:1 ratio and used £75000 profit in my example

	Appropriations account			Balance on Profit
Partner	A	B	C	75000
Salary	10,000	8,000	11,000	46,000
Cap Int	2500	1750	750	41,000
Cap Draw	-500	-750	-550	42,800
Profit share	14267	14267	14267	0
	26,267	23,267	25,467

Partners accounts

	A		B		C
Current Yr	Dr	Cr	Dr	Cr	Dr	Cr
Balance b/d		5000		2000	2500
Drawings	10000		15000		11000
Appr Acc		26267		23267		25467
Balance c/d	21267		10267		11967
	31267	31267	25267	25267	25467	25467

Next Yr
Balnce b/d		21267		10267		11967

In the partners accounts I have given my own opening balance (partner C was overdrawn at the beginning of the finacial year)

Hope that helps
Bill

-- Edited by Wella on Saturday 20th of March 2010 12:08:15 PM

Minty · Veteran Member

Hi Bill.

I follow that - thank you.

I realised that I'd made a typo in my scenario - Net Profit meant to read £175,000, not £75,000.

And my ratio was 'per capital'. So, 50%, 35% and 15%.

I have another query though:

I still don't quite understand how the Salary posting works - I understand the Appropriation posting, but what are the postings for salaries throughout the year.

Since partner salaries are not to be recorded as expenses as they're just a different way of drawing on the profits, where do they get posted to?

Look forward to your advice (or anyone elses). smile

And your help is much appreciated. wink

-- Edited by Minty on Saturday 20th of March 2010 06:23:36 PM

-- Edited by Minty on Saturday 20th of March 2010 06:24:25 PM

-- Edited by Minty on Saturday 20th of March 2010 06:25:58 PM

-- Edited by Minty on Saturday 20th of March 2010 06:26:54 PM

littlebookkeeper · Senior Member

Minty,

I would have separate accounts set up in sage for each individual partners salary and each partners drawings as these are 'cash' transactions and not just adjustments to the current account. The effect is the same as posting straight to the current account but it makes it easier when you are doing your appropriation account I think, your choice though.

The salary is treated the same as the drawings and is deducted from the profit in the appropriation account before calculating the profit share.

Carole

lor · Guru

This is a good thread, I have been reading it just incase I do get a partnership approach me.

Even though I did partnerships in my AAT course I haven't touched them since or done any real life stuff on them. But this thread is very helpful in understanding them.

Rhianrach · Expert

lor wrote:

This is a good thread, I have been reading it just incase I do get a partnership approach me.

Even though I did partnerships in my AAT course I haven't touched them since or done any real life stuff on them. But this thread is very helpful in understanding them.

When abouts does it get covered in the AAT is it intermadiate or technician.

I personally don't get any of it smile

I always thought that partners drew money rather than get a salary but I suppose it's the same thing just more controlled.

Wella · Expert

Rhianrach wrote:

I personally don't get any of it I always thought that partners drew money rather than get a salary but I suppose it's the same thing just more controlled.

Salaries are often paid to compensate where one partner may have more responsibility than another. For example one partner may only supply capital and take no active part in the business. To compensate the working partner he can draw down a salary (usually set out in the partnership agreement).

Hope that helps to explain why some partners get a salary.

Bill

Shamus · Forum Moderator & Expert

Hi Steve,

your sort of right.

A partnership is basically a collection of sole traders gathered together to share the risks and rewards of a common business. Or as you've probably read in your books "Carrying on a business in common with a view to profit".

The partnership agreement details the actual split of profits and losses and there may be all manner of arrangements in there such as interest of capital / drawings / profit ratio's / Salary etc.

The Partnership Act (1890) does not allocate a salary to partners and shares Profits equally but the contents of the act are overridden by individual arrangements.

There are many salaried partners who do not participate in the profit / loss of a partnership. This often happens as a form of reward. Think of these as a second tier of partner. Or more correctly they're called a partner but in reality are not as per the pure definition of the word.

Partners who do have a financial interest in the running of a company (these will be the sort of partner that you deal with most often) may take a salary but such is merely a fixed amount of the company profits which are allocated prior to any other profit distribution arrangement. It is not really a salary as such just another way of dividing the profits.

Regardless of the psuedo salary arrangement undrawn profits are still taxable on the actual partners (rather than actual salaried psuedo partners (see above)).

The key is always the individuals obligation to losses arising from the partnership. If they can share the loss then they are a true partner and the salary is merely a fixed profit distribution before other distribution methods are taken into account.

Note that for some partners they only have the psuedo salary under the partnership agreement and no further rights to distibution of profits but they may still be risking their own money in the partnership so have rights under a breakup situation.

Only if there is no risk of loss then they can be salaried in the traditional sense under PAYE.

The above is not exhaustive and there are numerous various other partnership arrangements. The key is always with the partnership agreement.

Apologies if I've not explained this very well but hope that this helps,

Shaun.

Rhianrach · Expert

Thanks Shaun and Bill, good explainations.

It seems partnerships are a more complicated area than I thought, though I'm sure a lot of it would be dealt with by solicitors and contracts and my job would be putting figures into the correct place.

I take it then that a partner could take a guaranteed payment or drawing and call it a salary, this would become part of their drawings, (the percentage of which would be most likely defined by how much capital each partner introduced), so therefore taxed altogether at a personal rate?

Maybe confuse

Minty · Veteran Member

Shamus wrote:
Partners who do have a financial interest in the running of a company (these will be the sort of partner that you deal with most often) may take a salary but such is merely a fixed amount of the company profits which are allocated prior to any other profit distribution arrangement. It is not really a salary as such just another way of dividing the profits.

Regardless of the psuedo salary arrangement undrawn profits are still taxable on the actual partners (rather than actual salaried psuedo partners (see above)).

The key is always the individuals obligation to losses arising from the partnership. If they can share the loss then they are a true partner and the salary is merely a fixed profit distribution before other distribution methods are taken into account.

Note that for some partners they only have the psuedo salary under the partnership agreement and no further rights to distibution of profits but they may still be risking their own money in the partnership so have rights under a breakup situation.

Only if there is no risk of loss then they can be salaried in the traditional sense under PAYE.

The above is not exhaustive and there are numerous various other partnership arrangements. The key is always with the partnership agreement.

Apologies if I've not explained this very well but hope that this helps,

Shaun.

My confusion is in the following:

Are we talking about 2 completely unrelated 'Salaries' here????

Because some people are only mentioning the 'appropriation' posting for Partners' salaries. Still others, are only mentioning an actual bank transaction.

Now, based on your post above, Shaun, I think I'm getting this.....correct me if I'm still wrong.........

What you are saying is that some 'partners' (lesser ones, shall we say) can receive a bona fide Salary from the bank, in hard cash. These payments are subject to PAYE, etc. and will be classed as an expense. These Salaries are absolutely nothing at all to do with appropriation.

HOWEVER, the 'Salary' we are talking about in the appropriation of profit and loss is not paid from the bank, but is simply an adjustment figure.

Have I understood that correctly? That the 'salary' used in appropriation has nothing to do with a monetary payment.

It's not that I cannot understand a principle, it's that people seem to be saying different things!

All I want is a simple answer!!

-- Edited by Minty on Sunday 21st of March 2010 12:18:27 PM

-- Edited by Minty on Sunday 21st of March 2010 12:19:51 PM

-- Edited by Minty on Sunday 21st of March 2010 12:46:59 PM

-- Edited by Minty on Sunday 21st of March 2010 12:48:34 PM

-- Edited by Minty on Sunday 21st of March 2010 12:48:59 PM

-- Edited by Minty on Sunday 21st of March 2010 12:55:27 PM

Wella · Expert

Hi Matthew

I'll try again but I can guarantee, that there will be another way of putting it.

Both your assumption are correct.

If a partner,say, has a £12000 pa salary and subject to it being allowed in the agreement, he is paid monthly you could Cr Bank (write a cheque for £1000 to the partner) Dr £1000 to the partners salary account. At the year end, you could then Dr P&L and Cr Partners salary account, which will adjust the remaining balance in the P&L for division among the partners and bring the salary account to a nil balance ready for the next year.

If the agreement does not allow this then it will be a transfer of £12000 from the appropriations account to the partners current account as salary. Most partnerships work on the basis of removing as little money as possible, as late as possible, that's why there is often interest charged on drawings and salary is paid at year end, rather than monthly, to discourage removing capital and keeping it in the business as long as possible. The partners current accounts are a fluctuating capital accounts

As Shaun says, the Partnership Act 1890 makes no provision for a salary payment and no right to claim one exists unless it is written into a Partnership Agreement. This is what will dictate how much, when and how a partners salary will be allocated.

Like I said at the top of the post, there will many variations on the theme but the last paragraph will be the deciding factor.

Any clearer? Hope it amde some sense

Bill

-- Edited by Wella on Sunday 21st of March 2010 01:38:58 PM

Shamus · Forum Moderator & Expert

Hi Matthew,

I concur completely with Bill.

The complication that I added earlier (which I probably shouldn't have done because it just confuses matters) was basically for the people who are made partners of a company but do not share the business risks.

Again the various different levels of partner would be written into the partnership agreement.

For this type of partner only there can be a PAYE arrangement as they are not really partners in the true sense of the word.

For traditional partner arrangements where the partners share the risks and rewards of ownership the salary is no more than a preset level of profit share and although called salary in reality is not.

Think of it as Bill, Shaun, Rob and Neil set up in partnership. Bill has skills that the others need (obviously if you read his posts!) so to entice him to join the initial agreement drawn up states that before any profit share Bill will be given an annual salary of £20,000.

The reality of the situation is that before any division of profits between the partners Bill will get £20k. So, on profits of £140k on an equal share basis, Bill will receive £50k (£20k salary and £30k profit share) and the others will receive £30k each.

However, Bill has not received £20k under PAYE, he has just had £20k more of the profit by calling it a salary even though in reality it is not.

Because the money has been allocated to a partner does not mean that it will actually be taken from the bank. It just means that the capital account of the partners will increase of decrease by the relevant amounts.

The partners own everything in the company and are taxed on this basis regardless as to whether or not they take the money from the company.

Salary and profit share can get a bit complex when the business is making a loss as the salary is treated to all intent and purpose as a cost to the business rather than profit share. So, unless the partnership agreement states otherwise, the "psuedo" salary will be paid even where the business is making a loss.

Mmm, maybe I shouldn't have mentioned losses in the same way that I shouldn't have mentioned PAYE partners. Oh well, it's in the mix now!

This is a fun filled area Matthew and much depends upon the contents of the partnership agreement.

Hope that this message has answered a few questions without creating too many new ones.

Shaun.

Wella · Expert

Thanks very much Shaun, I accept.

The only well known partnership I can think of where partners are paid PAYE is the John Lewis Partnership. Non of the workers are employees, they are all partners but do not have any financial stake in the business. They do get a profit share but it is a bonus rather than a true share of profit (a good percentage mark up on their basic).

Bill

Rhianrach · Expert

So it's something your not likely to come across in reality whilst your a self employed bookkeeper?

Shamus · Forum Moderator & Expert

Hi Steve,

Only the part about partners coming under PAYE. Not the bit about them having a Psuedo salary which is quite common with partnerships.

Like all things in this business though it's something to be aware of and keep in the back of your mind.

Don't know about you but I really don't think that I came with a brain of the right capacity for this business as I'm sure that the facts that I need keep leaking out!

Shaun.

Wella · Expert

Hi Steve

No, I think it is something you may very well come across. It just might not be as we have said!!

It really does depend on if there is any Partnership Agreement that stipulates what is agreed between the stakeholder partners.

Bill

Rhianrach · Expert

Shamus wrote:

Hi Steve,

Only the part about partners coming under PAYE. Not the bit about them having a Psuedo salary which is quite common with partnerships.

Like all things in this business though it's something to be aware of and keep in the back of your mind.

Don't know about you but I really don't think that I came with a brain of the right capacity for this business as I'm sure that the facts that I need keep leaking out!

Shaun.

I'm glad I'm not the only one with a leaky brain.

Trying to study for an exam tomorrow (computerised accounts AAT, 11/2hrs to do the computerised part which includes setting up a company plus customers plus suppliers plus all the invoices credits and reccuring payments and payments and reciepts plus journal corrections and reconciliations and printing off all the reports etc etc then produce a forecast on excel and write a report on it then produce a word document on computer and data security and retention and health and safety) 11/2 hrs to do that when the rest of the skills tests were 3 hrs to do something that took an hour tops, pfffffft at AAT and their strange timings.

On top of that I've been introduced (forcibly by the missus) to the psychology of childrens play and up-bringing specifically for 2 kids one aged (almost ) 3 and one aged (almost ) 7, oh plus I need to learn pivot tables.

I think I'll just try and chill on further aspects of partnerships, the one I'm working for at the moment are married and just draw money,Ahhhhhhh nice and easy.

All of this however is worth noting for future reference and will be opened as a tab for future use as I believe I will come across this at some point. Unfortunately my learning ability requires me to have live examples otherwise it really does go in one ear and out of the other.

Hope this explains why I don't often get simple things. wink

Rhianrach · Expert

Wella wrote:

Hi Steve

No, I think it is something you may very well come across. It just might not be as we have said!!

It really does depend on if there is any Partnership Agreement that stipulates what is agreed between the stakeholder partners.

Bill

Ahhhhh at the moment the partnership I'm dealing with is man and wife and they just draw money so for now things are easy wink

Shamus · Forum Moderator & Expert

Good luck with the exam tomorrow Steve.

For Pivot tables read the David Carters five minute Excel guides over on Accounting Web. Much, much better than any book I've ever encountered on the subject. You also get some data files to try it all out yourself.

Only downside is that it's for pre 2007 versions of Excel. At some stage I'm going to have to run through all of David Guides again and try and do what he's suggesting using Excl 2007. I know that everything is still there just Microsoft have done a better job of hiding it all.

Wella · Expert

Good luck from me too Steve.

Minty · Veteran Member

Thanks for taking the time to guide me through this, Shaun & Bill.

You have the patience of saints

. I understand fully now.

The likes of Steve & myself bow before your presence - we are not worthy!!

Steve - the very best to you for tomorrow!

-- Edited by Minty on Sunday 21st of March 2010 07:46:53 PM

Rhianrach · Expert

Cheers folks, hopefully it won't be so bad wink

Cheers Shaun I'll hope a peek at the pivot table tutorials and try to master them smile

lor · Guru

Going from memory Intermediate.

I still have all my AAT books filed in a book, spine side up, so if I need a quick reference its easy to find, and they are still useful! I have loads of them aat books, lol!

I find them easy to understand and there are questions and answers in some of the books, the tutorial I think they are called going by memory! Haven't got one out for a few months!

-- Edited by lor on Monday 22nd of March 2010 08:31:11 AM

Rhianrach · Expert

lor wrote:

Going from memory Intermediate.

I still have all my AAT books filed in a book, spine side up, so if I need a quick reference its easy to find, and they are still useful! I have loads of them aat books, lol!

I find them easy to understand and there are questions and answers in some of the books, the tutorial I think they are called going by memory! Haven't got one out for a few months!

-- Edited by lor on Monday 22nd of March 2010 08:31:11 AM

Thats good sounds like I'll enjoy intermediate wink

littlebookkeeper · Senior Member

Minty wrote:

My confusion is in the following:

Are we talking about 2 completely unrelated 'Salaries' here????

Because some people are only mentioning the 'appropriation' posting for Partners' salaries. Still others, are only mentioning an actual bank transaction.

Now, based on your post above, Shaun, I think I'm getting this.....correct me if I'm still wrong.........

What you are saying is that some 'partners' (lesser ones, shall we say) can receive a bona fide Salary from the bank, in hard cash. These payments are subject to PAYE, etc. and will be classed as an expense. These Salaries are absolutely nothing at all to do with appropriation.

HOWEVER, the 'Salary' we are talking about in the appropriation of profit and loss is not paid from the bank, but is simply an adjustment figure.

Have I understood that correctly? That the 'salary' used in appropriation has nothing to do with a monetary payment.

It's not that I cannot understand a principle, it's that people seem to be saying different things!

All I want is a simple answer!!

-- Edited by Minty on Sunday 21st of March 2010 12:18:27 PM

-- Edited by Minty on Sunday 21st of March 2010 12:19:51 PM

-- Edited by Minty on Sunday 21st of March 2010 12:46:59 PM

-- Edited by Minty on Sunday 21st of March 2010 12:48:34 PM

-- Edited by Minty on Sunday 21st of March 2010 12:48:59 PM

-- Edited by Minty on Sunday 21st of March 2010 12:55:27 PM

Hi Minty,

I am very sorry if I confused you by saying salaries were paid from the bank, obviously partners don't take the 'cash' for the salary if the business is not making any money and as you said, it is then a current account adjustment. I was trying to use a simple example where drawings and salaries were actually 'paid' so as not to confuse further, but think it backfired!

Anyway, I am glad you have got it all clear in your mind now,

Carole

Minty · Veteran Member

littlebookkeeper wrote:
Hi Minty,

I am very sorry if I confused you by saying salaries were paid from the bank, obviously partners don't take the 'cash' for the salary if the business is not making any money and as you said, it is then a current account adjustment. I was trying to use a simple example where drawings and salaries were actually 'paid' so as not to confuse further, but think it backfired!

Anyway, I am glad you have got it all clear in your mind now,

Carole

No Carole! Please don't feel bad!! You have helped me immensely with your post further up this thread.

I merely picked up on the fact that I could now see 2 different types of 'salary' - cross purposes, I guess - hence more and more confusion on my part.

Also, prior to your post re: bank & salaries I had already noticed in Sage that there was a nominal code for Partner's Salaries (in the 6000s range of Accountants or Legal Chart of Accounts). So it added weight that there was potentially a 'real money' Salary, too.

I think I, myself, have confused everyone else in this whole thread - that's the problem. cry

Sometimes, I think that when you have gotten yourself into a confused mess over some strange accountancy issue, it's twice as hard for others to explain to you, as you tend to latch on, in your brain, to some parts of it that you think you do understand, even though they're wrong, as it's comfortable!

All's well that ends well, though, as I have the complete picture now. smile

Thank you all, for your patience.

Matthew

-- Edited by Minty on Monday 22nd of March 2010 03:50:13 PM

Minty · Veteran Member

Aaaaargh!!

Thought I had this, but have tried to piece together all the advice, and now I am getting THREE types of salary:

a) Some partners are paid a proper salary (real money), but it is used in calculating profit and loss (ie. a cost to the business), and is subject to PAYE. But this type of partner salary is NOT used in the appropriation of profit/loss. These partners have no share of the profit/loss of the business.

b) Some partners are paid a proper salary (real money), but because these partners do share in the profits of the business their 'salary' is not classed as a cost to the business, but rather a draw on profit, so it's used in the appropriation of profit/loss.

c) Some partners receive a salary, but it is not actually 'paid'. Rather, it is just a figure used in the appropriation of profit/loss.

?

-- Edited by Minty on Tuesday 23rd of March 2010 01:24:14 PM

-- Edited by Minty on Tuesday 23rd of March 2010 01:29:49 PM

littlebookkeeper · Senior Member

Hi Matthew,

a) correct, this is totally separate from any profit appropriation so does not affect profit share or partners current accounts.

b) and c) I would try not to think of as being different types of salary, they are the same type, just one has been paid and one hasn't?

b) and c) are treated the same in the appropriation account, ie the salary will be deducted from profit before the profit share allocation but they will have a different effect on the partners current account.

Try then to think of the partners current account as a 'creditor' of the business (unless overdrawn). If the salary was ' actually paid from the bank' then the partners current account balance would reduce by the payment. If the money isn't actually paid, then it won't.

So in both cases b) and c)

you would DR profit and loss CR partners current account

Then in case of b) when the salary was actually paid from the bank you would DR partners current account CR bank.

Is this any clearer or have I confused you further?

Carole

Shamus · Forum Moderator & Expert

Hi Matthew.

I think that your over complicating it.

Ignoring the pseudo partners for a moment where they are called partners on the letterheads but do not actually have the true risks and rewards of ownership. Think of those more as just employee's who are called partners. (thats category A taken care of).

Right, now we are left with the real partners (category B and C in your list).

Just take it that partners receives a division of the profits of the company. That some of this is called salary is just a preset level of division that they are given before the rest of the profit share. It is not really salary for PAYE purposes.

All partners are paid by allocation of profits. That money does not get paid out of the company unless they take it out. All that happens to it on allocation is that it is added to / subtracted from the partners capital accounts.

So, as you can see categories B and C are actually exactly the same.

Hope that helps clarify matters.

cheers,

Shaun.

Shamus · Forum Moderator & Expert

Hi Carole,

four seconds apart!

think that we pretty much agree on the treatment there. Think that you said it a little better than me though.

talk soon,

Shaun.

-- Edited by Shamus on Tuesday 23rd of March 2010 02:03:49 PM

Minty · Veteran Member

Carole said:

If the salary was ' actually paid from the bank' then the partners current account balance would reduce by the payment. If the money isn't actually paid, then it won't.

Shaun said:

All partners are paid by allocation of profits. That money does not get paid out of the company unless they take it out. All that happens to it on allocation is that it is added to / subtracted from the partners capital accounts

=======================================

BINGO!

So drawings are just the realisation of the salary (but a partner can of course overdraw)?

I think that's where I've been going wrong. I didn't understand the relationship between drawings and salary. Drawings are how the partner gets his/her salary!! Doh!!

At each year-end, any partners' salaries are posted to their current accounts regardless of whether taken or not. The drawings will simply reflect the amount that has been drawn against it?

-- Edited by Minty on Tuesday 23rd of March 2010 02:24:51 PM

-- Edited by Minty on Tuesday 23rd of March 2010 02:25:18 PM

littlebookkeeper · Senior Member

Hi again Matthew,

I think you might be confusing the 'cash actually paid from the bank for the salary' as being drawings, am I picking that up right?

Putting it simply, a partnership may agree for the partners (not the one who has no interest in the business, forget that one) to have :

Just a salary
A salary and profit share
just a profit share.

A partner who has just a salary and this is all he is entitled to, will be paid his salary monthly and nothing else if that is what is agreed.

A partner with just a profit share takes his share out of the business in the form of 'drawings,' so drawings are always 'paid' (unless they are a payment in kind eg the business has paid a private cost on behalf of the partner).

A partner with a salary and a profit share may choose to just to take his salary out, or he may take his profit share out in the form of 'drawings' asswell as his salary which are paid from the bank and/or cash.

Any clearer?

Carole

Minty · Veteran Member

littlebookkeeper wrote:

Hi again Matthew,

I think you might be confusing the 'cash actually paid from the bank for the salary' as being drawings, am I picking that up right?

Putting it simply, a partnership may agree for the partners (not the one who has no interest in the business, forget that one) to have :

Just a salary
A salary and profit share
just a profit share.

A partner who has just a salary and this is all he is entitled to, will be paid his salary monthly and nothing else if that is what is agreed.

A partner with just a profit share takes his share out of the business in the form of 'drawings,' so drawings are always 'paid' (unless they are a payment in kind eg the business has paid a private cost on behalf of the partner).

A partner with a salary and a profit share may choose to just to take his salary out, or he may take his profit share out in the form of 'drawings' asswell as his salary which are paid from the bank and/or cash.

Any clearer?

Carole

Okay.

So, in the case of a paid 'salary':

Cr Bank
Dr Salary Account

Then at Year-end:

Cr Salary Account
Dr Profit & Loss

In this scenario, the partner's Current Account has no record of the Salary. But since the partner has already received the salary it shows a correct representation of that partner's claim.

If however, the salary is not 'drawn', then the salary figure goes into the Current account:

CR Current Account
DR P & L

Thus showing the partner still has that claim on the profits.

Do I have it now?

-- Edited by Minty on Tuesday 23rd of March 2010 05:56:37 PM

littlebookkeeper · Senior Member

Yep, I think you've got it!

Carole

Minty · Veteran Member

littlebookkeeper wrote:

Yep, I think you've got it!

Carole

Thank you, so much Carole.

I am not as dense as I may be coming over, honest!

-- Edited by Minty on Tuesday 23rd of March 2010 05:58:22 PM

littlebookkeeper · Senior Member

Not at all!

It is a complex thing to get your head round but hopefully now you'e got it, it will stick. Glad to be of assistance.

Carole

Shamus · Forum Moderator & Expert

Matthew,

you've not come across as dense at all.

Its good to have questions like this as it makes sure that besides being able to do it ourselves that we're not losing the ability to explain the nuts and bolts to others.

You may notice from some of the other threads that the simple questions can end up becoming the ones with the most complex answers and ending up in debates where everyone's viewpoint is quite valid... Generally those debates relate to tax and VAT.

Hope that everything is now fitting in place. If not never worry about posting follow up questions.

Talk later,

Shaun.